Paying off the house (and car)?

[Craig]

Yes, that old question ... but did a search, and couldn't find any topic subjects directly on point.

I'm not going to be retiring early, unless my late 50's qualifies, and my luck holds out (age 52 now).

But we've been reasonably fortunate, with over $2K per month net rental income on paid off rental properties, a relatively low house payment ($1,550/mo.) and good paying job with potential equity in the company (as stable as any job can be, these days).

Cash flow is strong enough that we can save $50K/year, and still amortize our home loan off in 5 years.  Cars are paid off, no other debt.  

Just contacted Wells Fargo this evening to bump our principal payments.  Wife thinks I'm a little batty, as we angled for a low house payment ... explained to her that is a hedge if we hit hard times, and we can always back the house payment down if cash flow becomes an issue.

What are your perspectives on paying off the house, or car for that matter?  The strictly financial side of me says to keep that 5.625% mortgage as high as possible, keep that 4% auto loan from the credit union, and dollar cost average the foregone additional principal payments into a stock index fund, or

I tend to hedge ... can't know what the market will do, where interest rates will be, what the real estate market will do, so ... spread the resources around a bit.  If the home and car are paid off, and we still have $700K plus in liquid assets (pre and post tax) after 5 years, then we're well hedged for either retirement, or my next "adventure" in business.

[One other thing I should mention ... at this point in life, and after working da*n hard (like 70 hour weeks at times) as a "professional", those folks with pensions are looking very, very smart to me these days ... a real rarity in most companies, and have never participated in one in my entire career.]

Thanks.

Regards,

Craig

 

[BUM]

I tend to hedge ... can't know what the market will do, where interest rates will be, what the real estate market will do, so ... spread the resources around a bit.  If the home and car are paid off, and we still have $700K plus in liquid assets (pre and post tax) after 5 years, then we're well hedged for either retirement, or my next "adventure" in business.

[One other thing I should mention ... at this point in life, and after working da*n hard (like 70 hour weeks at times) as a "professional", those folks with pensions are looking very, very smart to me these days ... a real rarity in most companies, and have never participated in one in my entire career.]

Craig

It sounds like your doing fine and that you and Mrs. Craig are savers. Thats the ticket to ER or whatever. Just think about spreading that savings around in some investments that match your risk tolerance. I ER'ed with way too much in cash for many many years because it felt safe. In retospect that cash could have been working alot harder.

Funny about those "pension people", the older I get, the smarter they look. Oh yeah and I also forgot to go to medical school.


About your mortgage, and car loan... I'm one of those old fossils that are absolutely convinced that no debt is better than any debt. Good Luck! and keep sockin' it away!

BUM

 

[John Galt]

Hello Craig and BUM. I agree with all you wrote.........
(no debt, etc)

Re. "pension people", I never worked at a "pension
company" either. My Dad draws a pension in addition
to his and Mom's SS. He says "We could make it without the pension but it would be damn hard."
Anyway, the "pension people" were only smart if they
enjoyed their work. No pension is worth being miserable for years to get it.

JG

 

[gratefuled]

Google the words "pension renege" and you'll feel better about managing your own retirement funds.

 

[Craig]

Thanks for the feedback ... appreciated.

gratefuled ... and thanks for that. I've wondered about that issue as well, and recognize it is a risk. I suppose that at the end of the road we get to look back over all of our decisions, and see whether we were generally right, or generally wrong ... and I imagine we'll all have some on both sides.

 

[Cut-Throat]

Craig,

I was faced with the same decision last year and decided to pay off the mortgage.

My logic was that since I was not 100% invested in the stock market(60/40), I was looking for as much growth as possible from my Bond Portion.

Everyone here reccomends I-bonds which pay about 3.67% currently. Paying off the mortgage nets about 5 1/2%.

 

[Nords]

What are your perspectives on paying off the house, or car for that matter?  The strictly financial side of me says to keep that 5.625% mortgage as high as possible, keep that 4% auto loan from the credit union, and dollar cost average the foregone additional principal payments into a stock index fund, or

Here's our approach: http://early-retirement.org/cgi-bin...t_board;action=display;num=1097286220;start=0

It's not for everyone and it's too early to tell whether it'll work or not, but the thread lays out all the issues (without necessarily reaching a conclusion).

Borrowing at 5.625%, especially with an interest deduction and strong cashflow, is quite likely to earn more money in the stock market over the next three decades. But it's not worth borrowing at that interest rate to buy stocks while (if) you hold other bonds paying less interest.

It's a personal decision-- you have to look at your entire retirement portfolio allocation, your tolerance of volatility, and your "sleep-at-night" factor.

 

[Bob_Smith]

About your mortgage, and car loan...  I'm one of those old fossils that are absolutely convinced that no debt is better than any debt.

BUM, well said! That is exactly how I feel. It may not always be the most logical, but the simplicity and freedom that comes with being completely unencumbered is worth more to me than the little I may (or may not) make by borrowing.

 

[Calgary_Girl]

I guess I'm an old fossil too (32 yrs old ) since I also like being completely debt free. Hubby and I paid off our mortgage 3 years ago and we now invest our old mortgage payments and also max out our retirement plans. I LOVE being debt free

 

[BUM]

 I LOVE being debt free  

CalGal (if I can be so informal),

Me Too! I was having my taxes done and the preparer asked me how much credit card debt I had. I repsponded, "None". She stood up on her chair an announced to everyone in the office, "Attention everyone I have a client here who has NO CREDIT CARD DEBT". I was both amused and embarrased. That was about 20 years ago.

Except for a 0% car loan I'm still debt free. And I'm quickly paying that down.

BUM

 

[Zipper]

Calgary_Girl, myself, and other Canadians try to kill a mortgage ASAP.

We don't have the luxury of deductible mortgage interest.

 

[Calgary_Girl]

Me Too!  I was having my taxes done and the preparer asked me how much credit card debt I had. I repsponded, "None". She stood up on her chair an announced to everyone in the office, "Attention everyone I have a client here who has NO CREDIT CARD DEBT". I was both amused and embarrased. That was about 20 years ago.


BUM

Similar story with our banker - he asked us if we had any friends that were like me and hubby that he could possibly get as clients. It makes it a lot nicer to sleep at night knowing that we don't owe anybody one single dime.

 

[Calgary_Girl]

Calgary_Girl, myself, and other Canadians try to kill a mortgage ASAP.

We don't have the luxury of deductible mortgage interest.

You got that right Zipper! But just think how much we'll save in the long-term on health care costs by being Canucks....

 

[kayelem]

Count DH and I in on the no mortgage, no credit card debt, no car loan camp. And we're not yet fossils.

Deductible mortgage interest is just a great way for folks to "convince" themselves they "need" a McMansion, since it would be so silly not to buy a huge house and get to take that big credit. The math never works.... People always say they will invest that money in the market and get a better return, but I think that in most cases that is not the case (higher property taxes, furniture, keeping up with the Jones' to match the McMansion etc.)

Craig is not in that camp I know. But it is still a wonderful feeling to pay no interest on debts and put that money straight into savings . We know we can turn on a dime if we need to cut our expenses for some unforeseen reason.

I personally would not think of retiring early with any debt unless I had a certain income stream to make sure those debts were covered. That's just me, I am very conservative.

 

[John Galt]

Hello kayelem! I am solidly in the "no debt" camp
also. Once in a while I see a "deal" which might require
borrowing to get in. So far I have opted not to
participate unless it is a 100% (and passive) slam-dunk.
The feeling of -0- debt is quite euphoric in my case.
I also liked your "turn on a dime" phrase. I feel the same.

JG

 

[AltaRed]

I fully agree with those here on the 'no debt' mantra. The only interest spouse and I ever paid was initially for a 5 year period after university to pay off student loans, and then for residential mortgages. The last mortage was paid off 15 years ago. The key was to then invest those former payments into investments that grow your net worth.

 

[farmerEd]

>>The key was to then invest those former payments into investments that grow your net worth.

That is one way to think of it, and makes sense when you are starting out to do it that way; in my case, once I paid off the mortgage I said to myself, "now theres a couple thousand dollars per month I don't need to make anymore...ever"....and downsized my work schedule accordingly.

 

[sgeeeee]

I could have purchased my current house without a mortgage when I bought in late 2001. And I could pay it off tomorrow (well, at least the day after tomorrow . . . tomorrow is Sunday).

I've chosen instead to invest the money in my portfolio and benefit financially from the returns. The odds are with me since I have a diversified portfolio and a 5% mortgage. Historically, a 30 year diversified portfolio beats the 5% loan payoff every time -- and beats it by quite a bit through most of financial history. I track my progress at least once per year, and so far I am ahead of the payoff decision by approximately 30% of the loan value. Of course if I change my mind, I can always choose to make that payoff on Monday.

 

[John Galt]

Salaryguru................ a wise choice IMHO, and you have history on your side. The 30 year slices of history you refer to don't
influence me much though. Alas, most of my history
is history

JG

 

[cute fuzzy bunny]

Wow you did a search and couldnt find any discussions on the subject? I think we need a better search tool...

Well so far everyone I've heard from has no mortgage, has a mortgage but no investments that return less than the mortgage (ie, a 100% stock portfolio), plans to actually remain in the home for the 30 year term of the mortgage, or is a doody head. I think you know who you are. Hint: theres only one doody head, to the best of my knowledge.

Because chances are you wont stay in the house for 30 years, invalidating the "30 year historical" argument - you're more likely to be in the home for the 7 year national average, so you need to look at it as a set of 7 year calculations and you only know the numbers for the first 7 year period. Hint: there are a lot of 7 year periods with negative returns.

Chances are if you have bonds paying 3% while paying 5% to a bank for a mortgage you lack simple math skills. Yes, rates may rise on bonds, but your NAVs will get spanked on the way.

And if you're 100% stocks, god bless you and whatever prescription meds you're employing to close your eyes at night. With valuations like these, I'd hate to be literally betting the farm on 7 or 30 more years of goodness starting from here.

No debt, a far more conservative portfolio than I'd need to afford to pay a mortgage (which results in superior sleeping skills), no income taxes paid for 3 years now due to ridiculously low withdrawal rates as a result of not having to pull 10-20k a year out to pay for said mortgage, ability to reduce my withdrawal rate down to 8-12k a year without biting the bullet too hard if a long tough time shows up, able to live a very nice middle class lifestyle on my dividends alone. Not to mention being able to put food on the table and pay the meager bills with any old job if need be.

Maybe its best if we reconvene this discussion after the next 40% drop in the s&p500 when the pro mortgage crowd are all trying to sell their spleens and extra kidneys on ebay to pay the bills

 

[John Galt]

TH........That's a classic man! Kudos are in order!
And........................"Doody" heads? Now that you are back, let me be among the first to say "Howdy".

JG

 

[sgeeeee]

I tried ignorance, emotion and hostility toward anyone who disagrees with me, but it didn't return nearly as much money as being a doody head.

 

[Nords]

Maybe its best if we reconvene this discussion after the next 40% drop in the s&p500 when the pro mortgage crowd are all trying to sell their spleens and extra kidneys on ebay to pay the bills

Well, on the LAST 40% drop we mortgaged the rental house to buy NASDAQ QQQQs in the 20s & 30s. (We picked a mortgage payment that equaled the rental's cash flow and we've since refinanced that to 5.5%.) I tend to call the bottom early & often so it took two years to make money. We've since sold at a profit, the money went up a bit in a small-cap growth ETF (IJT), and now it's up about 10% in the Dow Dividends ETF (DVY).

So on the S&P's NEXT 40% drop, we'll be the guys maxing out our shiny new zero-cost low-interest HELOC to buy stocks.

TH's advice is probably the best for the most, and it certainly involves the least volatility risk. I don't disagree with it and I'm not interested in prolonging an argument about which is "better".

But if you blissfully trust that past is prologue and if you're able to accomodate truly impressive volatility-- in both directions-- then mortgage-financed investments have a good chance for success. If you analyze/optimize all the numbers then the odds can be better than 70%. If the numbers look good and it feels right (no sleep deprivation) then you should seriously consider doing it. It's certainly easier (& less risky) than shorting individual stocks or trading options.

The mortgages are paid out of rental income or pension cashflow. Expenses are paid out of rebalancing from stocks into cash at long-term cap gains tax rates (with big deductions for previous cap losses and for mortgage interest) and we live a frugal life. I have no interest in parting with my spleen or any kidneys either.

I'm pretty sure that I'm not the doodyhead. Everyone has to choose the option that lets them sleep at night, and my sleep aids don't require prescriptions. We'll see how that changes over the next 29 years...

 

[doodyhead]

. . .  I think you know who you are.  Hint: theres only one doody head, to the best of my knowledge.

I just can't understand why you are so threatened by someone who chooses a financial strategy that is different from your own. You seem to jump in like a rabid dog to any thread where someone even mentions an alternative to paying off the mortgage. Call me doodyhead, but call me financially ahead.

 

[unclemick]

Heh,heh - there is a difference between aggressively agruing your postion and being threatened/threatening.

Alas - I vote for renting(but don't) and would probably be with Nords/Salaryguru - but,but - they don't give out Helocs to uninsurable fish camps over the water outside levee protection.

Great agruments - sort of like SWR.

Heck I even financed my 1999 Silverado at 9% - rather than sell individual stocks and was a Doodyhead all the way to the bank.